Lesson 2 – Ratios

Three ratios nonprofits need to track to pinpoint financial health:

Current Ratio = (current assets/current liabilities)

The current ratio reflects your ability to meet short-term financial obligations by comparing your current assets to your current liabilities. Current assets are typically defined as cash and other assets that are expected to be converted to cash within one year. Current liabilities are usually defined as organization’s debt or obligations that are due within one year. In simpler terms, current assets are used to pay your current liabilities. Ideally, you would want to have a current ratio of at least 1.0, which would indicate that your current assets equal your current liabilities.

Operating Reserve = (net assets without restrictions – (fixed assets – debt related to fixed assets)/annual expenses – depreciation and amortization

The operating reserve ratio indicates how long an organization can continue its operations without any revenue coming in to fund the operations. This calculation will give you a feel for the overall health of the organization and can be very helpful should a large portion of your revenue come from just a few sources.

Program Efficiency = (program service expenses/total expenses)

The program efficiency ratio compares total program expenses to total expenses. By performing this calculation, you can see how efficient your organization is in fulfilling its mission.